C-level change

Before Enron, before Sarbanes-Oxley, corporate secretaries spent a good deal of their time on corporate governance issues. In the two years since Sox, however, the emphasis on governance and compliance has intensified. In response, an estimated one third of US companies have already elevated someone, often the corporate secretary, to the position of chief governance officer (CGO). In fact, the trend is so pronounced that the American Society
of Corporate Secretaries (ASCS) will soon officially announce its new name: the Society of Corporate Secretaries and Governance Professionals (SCSGP). 

But what exactly are governance professionals? How is their job different from the traditional role of corporate secretary, and what does it mean to get the title of CGO? The CGO is responsible for spearheading all corporate governance issues and overseeing all compliance responsibilities, including compliance with federal and state laws and stock exchange regulations. Additionally, the CGO educates the board and management about laws, regulations, trends and what other companies are doing. It sounds very similar to the job description for corporate secretaries. 

Profile raising

Being given the title of CGO has raised the corporate secretary’s profile and prestige internally and externally, and increased companies’ focus on corporate governance, many say. While companies in heavily regulated industries have had CGOs for years, the dramatic increase in the amount of corporate compliance requirements has pushed the demand for them. It means board members have someone to turn to for advice and assistance on governance issues, and the company has someone to take the lead when it comes to compliance. Perhaps more importantly in the post-Sox era, investors now have a point-person inside. 

Few people doubt the increased focus on corporate governance is anything other than a good thing, but some fear the new title will be used by board members as a way to abdicate responsibility for governance. Anointing a corporate secretary with the CGO title could be seen as a PR move designed to win over investors and appease regulators. ‘Most organizations need to demonstrate they are taking responsibility,’ says Geoff Loftus, vice president, ASCS. ‘It’s not enough just to take responsibility – they need to demonstrate to investors and the SEC that they have done so.’ 

Most companies with even a whiff of scandal have appointed a CGO – often from outside the company to demonstrate they’re in a new era, free from the taint of previous misdeeds. But even those firms long practicing best governance are starting to see the position as crucial. 

Corporate lawyers are advising clients to appoint a CGO, as an insurance policy of sorts. ‘Just as with a code of ethics and conduct, you might get less of a sentence or fine when something goes wrong if you have a CGO with real authority and you can show the company is committed to oversight,’ says Bradley Rodos, a partner at the Philadelphia-based law firm Fox Rothschild. Rodos advises public companies on their required disclosures and filings and on securities compliance. 

But if corporate secretaries are already largely in charge of compliance and corporate governance, then what difference does having the title make in reality? Some of those with the title say it helps them do their job better. 

‘Prior to receiving the formal CGO title, I was already doing much of the governance work, because I viewed it as an important part of working with the board of directors as the corporate secretary,’ says Ann Mulé, CGO, assistant general counsel and corporate secretary for Sunoco, a petroleum and chemicals company based in Philadelphia. ‘But the title brings increased focus and recognition to the importance of the governance part of the job. It makes it clear to the external world that the company is focused on governance. And shareholders, large or small, know who to call.’ She adds that being a lawyer is an advantage in fulfilling the requirements of the job. 

Investor confidence

Large investors are paying more attention than ever to whether companies are being run for the benefit of shareholders. They are voicing their opinions more frequently and more forcefully. In addition to wanting to prevent destructive scandals, investors are pointing to evidence of a link between improved performance and good corporate governance. Equity analysts and debt-rating agencies are increasingly looking at a company’s governance practices in terms of risk factors they need to take into account. ‘Institutional investors have realized the power they have over time – I don’t see them letting up on their agenda,’ Mulé points out. 

It is this intensified scrutiny of corporate governance by investors, especially institutional ones, that is pushing many companies to appoint a CGO. But while many investors are clearly pleased to see the elevation of the issue of corporate governance, others worry it will result in board members being able to wriggle out of the responsibility for good governance. 

‘I question whether there should be one chief governance officer – all board members should have corporate governance at the top of their agenda,’ says Sylvia van Waveren, manager of corporate governance for PGGM, the public sector employees’ pension fund in the Netherlands, which holds shares in more than 2,500 companies. 

Other big investors are also concerned about the board’s role. ‘You can have an officer with the title of CGO, but you need someone who is in charge of the issue at board level,’ says Claude Lamoureux, CEO of Ontario Teachers’ Pension Plan. 

Despite these concerns, Calpers, the most vocal critic of US corporate governance, puts its considerable weight behind the CGO title. ‘Governance is the responsibility of the board and management and has to be ingrained in their philosophy, but we find most companies could use someone to keep it on the agenda, so the board doesn’t escape responsibility,’ says Brad Pacheco, spokesman for Calpers. 

Board scapegoat

Some companies have not appointed a CGO simply because they have not elevated the issue of corporate governance to a high-enough level internally, despite investor concerns and regulatory pressures. Others, however, reject the idea of appointing a CGO because they want to send a strong message that the CEO and chairman of the board are both functioning as chief governance officer. 

In practice, the CGO is not relieving pressure on the board but helping it fulfill its obligations, says Terry Gallagher, who in 1992 became the first CGO in the country at pharmaceutical giant Pfizer. ‘One of the things I did immediately was create a committee on the board made up of outside directors,’ he recalls. ‘They clearly understood the responsibility for corporate governance was with them and the board. There wasn’t any question of evading responsibility.’ Gallagher is now CEO of Corporate Governance Associates, advising companies on compliance issues. 

In fact, if the board wants to restructure its audit committee, for instance, it turns to the corporate secretary to find out the best practice for doing so. The board is taking responsibility for the change, but the corporate secretary is acting as advisor on the issue. With or without the title of CGO, a great deal of corporate governance is already in the hands of the corporate secretary. 

Gallagher says although the actual function of the corporate secretary might not change much with regard to corporate governance, his or her relationship with the board does shift. ‘The CGO becomes more of a trusted member of management,’ he explains. ‘In many cases, the corporate secretary has more of an administrative role with the board, while the CGO has a more substantive relationship. The CGO is advising the board on what it should be thinking about and what it should be changing.’ 

While the investor relations department often deals with shareholders who make decisions on a day-to-day basis about which shares to buy, hold or sell, it’s the CGO who is the point-person for the shares’ actual owners – so he or she is the one concerned about shareholder value long term. Another of Gallagher’s first moves was to visit the company’s 25 largest investors. ‘The IR person and I went together,’ he says. ‘However, we quickly found out that the IRO was interested in the investment managers while I was involved with the person concerned with governance. After four or five visits, we went independently. We really had two different purposes.’ 

Fast track

So what does getting the title of CGO actually mean? Increased prestige and power, more responsibilities, a bigger paycheck? ‘Being acknowledged in this way is a tremendous boost,’ notes Loftus. ‘But is it an actual promotion in terms of more staff or more budget? Usually not.’ Some corporate secretaries are therefore wondering why they should take on the additional responsibilities associated with the CGO position. 

‘To the outside world, the title of CGO looks like a promotion for the corporate secretary, because there is a misconception about the level of responsibility the corporate secretary has in the governance area,’ says Rodos. ‘The board knows the real level of responsibility of the corporate secretary, but not all investors do. It is also viewed as a promotion to the rank and file employees responsible for complying with the code of ethics.’ 

Mulé agrees: ‘It is recognition of increased responsibility and accountability. It is board recognition that you are the individual who will be held accountable.’